School District Fund Balance Policy

Governments, such as school districts, usually organize their accounting systems on a "fund" basis. A fund is a separate set of accounting records, segregated for purpose of carrying on an activity. A fund is established for accountability purposes to demonstrate that financial resources are being used only for permitted purposes. The Wisconsin Department of Public Instruction specifies the various funds required to be used by Wisconsin school districts. All school districts have a General Fund, and may have one or more other funds to account for specific activities. For example, special education activities are accounted for in the Special Education Fund. Transactions relating to payment of general obligation debt are accounted for in a debt service fund.

A fund will have "balance sheet" accounts consisting of "assets", "liabilities" and "fund balance," and a series of "revenue" and "expenditure" accounts. A "fund balance" is created or increased when fund revenues exceed fund expenditures for a fiscal period. Correspondingly, a fund's balance is decreased when fund expenditures exceed fund revenues. The balance sheet accounts identify the assets that belong to a fund, such as cash or a grant payment receivable; and what liabilities it owes, such an accounts payable to a supplier. The difference between the fund's assets and liabilities equals the "fund balance." A positive fund balance represents a financial resource available to finance expenditures of a following fiscal period. A deficit fund balance can only be recovered by having revenues exceed expenditures in a following fiscal period.

Administrators and board members need to understand what a fund balance is and its importance in budgeting decisions. A common misconception is that fund balance is a cash account, and therefore corresponds to the district's bank balance. As discussed above, fund balance represents the fund's total assets minus its liabilities (what a fund owns minus what it owes). Cash is an asset, but it usually is not a fund's only asset. The fund may also have liabilities, such as an accounts payable amount due a supplier that could result in a decrease in fund cash when they are paid off.

A portion of the balance in a fund may be committed, for example, to provide the funding for open purchase orders - often termed "encumbrances" or maintained at a certain level for working cash needs. In funds other than the General Fund, restrictions often apply to uses of balances in these funds. For example, a debt service fund balance cannot be used for paying salaries or be used for working cash. Fund balance is "surplus" only to the extent that it has not been committed, identified for a purpose or is available for re-appropriation to a different purpose.

Because the General Fund encompasses the school district activities not required to be segregated in separate funds, it is the fund that most likely will have available balances that can be appropriated and reallocated as specified by the School Board. For this reason our discussion is restricted to the district's General Fund. The fund balance for the General Fund is divided into following three reported accounts:

931 000 Reserved: The portion of the fund balance has been committed for identified purposes such as an amount needed to finance open purchase orders or unspent expenditure appropriations carried over for use in the following fiscal period as part of a site-based management process.

932 000 Designated: A fund balance amount that is not required to be identified as a reserve fund balance, but for which the school board has identified tentative uses such as an amount for to be maintained for working cash needs. School districts have varying cash flow situations dependent on the level to which a district is aided by the state, local property tax settlement calendars, and to a certain extent, payroll and benefit payment requirements.

933 000 Unappropropriated Fund Balance That portion of fund balance which has not been identified as being required or having been appropriated for a specific purpose. It should be noted that opinions of the Wisconsin Attorney General have stated that Wisconsin governments cannot accumulate fund balances without having a specified purpose for such balances.

Changes in the amounts included in reserved or designated fund balance accounts should be made in accordance with school district budget statutes.

How Large A Fund Balance?

Determination of an appropriate fund balance is a critical factor in district financial planning and budgeting processes, but it is strictly a local matter. The Department of Public Instruction makes no recommendation regarding the amount a district should have as its General Fund balance, except that the department encourages districts to seek legal counsel should they contemplate budgeting for and/or operating with a negative general fund balance.

As part of the budget process, the board must determine fund balance amounts to be:

• retained for working cash needs, recognizing that the working cash fund also serves as district's contingency or "rainy day" fund.
• used to fund expenditures of the next fiscal period, recognizing that if used for recurring expenditures, future budget decisions will revolve around finding resources to continue funding these expenditures.

A district with an appropriate fund balance can:

• avoid excessive short term borrowing thereby avoiding associated interest cost.
• accumulate sufficient assets to make designated purchases or cover unforeseen expenditure needs.
• demonstrate financial stability and therefore preserve or enhance its bond rating, thereby lowering debt issuance costs.

The most commonly asked question regarding fund balance is how large should it be? Perhaps the best answer would be: "an amount sufficient that short term borrowing for cash flow could be avoided and would also allow the district to set aside sufficient assets to realize its longer range goals." However, this may not always be practical or politically possible. The school board must make a policy decision as to the extent they will borrow for cash flow rather maintaining a working cash balance.

For questions about this information, contact dpifin@dpi.wi.gov (608) 267-9114

Last updated on 5/30/2008 2:56:50 PM